Home Loan Down Payment

Your home loan down payment is an amount you pay upfront to a bank or NBFC. The payment is represented as a token or percentage of the home’s total purchase price. The remaining balance of the purchase price is then funded using a home loan or mortgage. 

The down payment plays a crucial role in determining your loan eligibility and terms, as it directly impacts the loan amount you can secure. Before approving your loan, lenders evaluate several factors, including:

• Age

• Income

• Credit score

• Existing loans (if any)

• Nature of occupation or business

• Income tax returns

• Value of property

Based on these factors, your lender can notify you about the maximum home loan amount that you are eligible to get. Keep in mind that you are required to pay a portion of the property’s cost upfront as a down payment, while the remaining amount is covered by the lender.
You can check your eligibility and your EMI using the home loan eligibility calculator and home loan EMI calculator on Bajaj Markets. 

As per the Reserve Bank of India (RBI) guidelines, banks and financial institutions can fund up to 90% of the property’s value, depending on its price. For properties priced below ₹30 Lakhs, lenders may finance up to 90% of the cost.

If the property value falls between ₹30 Lakhs and ₹75 Lakhs, banks generally cover up to 80% of the amount. For properties priced above ₹75 Lakhs, the maximum loan available is up to 75% of the cost, with the balance to be paid as the down payment.

Paying a higher down payment can make your home loan more manageable and cost-effective. The key benefits include:

• Quick Loan Approval

A larger down payment demonstrates financial discipline and reliability. This increases the lender’s confidence in your repayment ability, which can lead to faster approval of your loan application.

• Lower EMIs

When you contribute more upfront, the principal loan amount reduces significantly. This lowers your monthly EMIs, making repayment easier to manage over the loan tenure.

• Lower Interest Rate

A higher initial contribution decreases the loan-to-value (LTV) ratio. This gives you better negotiating power with lenders, helping you secure a lower interest rate and reduce overall borrowing costs.

• Faster Loan Closure

By making a larger down payment, you build greater equity in your property from the start. This allows you to repay your loan faster, reducing the total interest outgo and achieving debt-free status sooner.

• Avoid Private Mortgage Insurance (PMI)

  A substantial down payment often eliminates the need for PMI, saving you additional monthly costs that do not contribute to your loan repayment.

• Protection Against Negative Equity

  With a higher upfront payment, you reduce the risk of owing more than your property’s market value if prices decline, safeguarding your financial position.

Choosing a minimal down payment lets you invest less initially while retaining more funds for other priorities. Key advantages include:

• You can tackle any emergency that may arise with the amount you save on a down payment.

• You have the option to allocate the saved amount towards various investment opportunities.

• A minimal down payment may lead to higher principal and interest amounts, which could result in higher tax deductions under current tax laws. However, this also increases your overall repayment burden.

• Making a minimal down payment leaves you with more funds for repairs, renovation, interior decor, etc.

You may face concerns while arranging for funds to pay your down payment, considering the soaring property prices. Have a look at the various challenges you may face with respect to your home loan down payment:

• Personal Contribution Required: You need to fund a portion of the property’s cost from your own savings (usually at least 10%), while the lender covers the rest.

• High Financial Burden: Saving for the down payment can be challenging, especially with ongoing financial commitments and the rising cost of property.

• Effect of Market Conditions: In a fast-growing housing market, property prices may rise faster than you can save, making it harder to gather the required funds.

• Funding Limitations: Down payment assistance programmes exist, but they often have strict eligibility criteria and may not cover a significant portion of the cost.

• Lender Requirements: Some lenders have strict down payment criteria, which could make it difficult to qualify for the loan, especially in higher-risk cases.

• Increased Loan-to-Value (LTV) Ratios: A lower down payment could result in a higher LTV, increasing monthly EMIs and total interest paid.

• Balancing Other Financial Goals: Saving for a down payment while managing other priorities like retirement or emergency funds can be tough for you.

• Challenges for First-Time Buyers: First-time homebuyers, lacking proceeds from the sale of a previous home, may struggle more to save for the down payment.

• Changing Lending Criteria: Lenders may adjust their down payment requirements based on market conditions or policy changes, making it difficult to predict the exact amount needed.

In order to make a down payment, it is important to plan your finances well in advance. Here are some tips to help you make a down payment without straining your finances.

• Start Early

The most practical and safe way to accumulate funds for your home loan down payment is to start saving money well in advance. Initially, you could start by investing your savings in high-return investments. Later, transfer the gains to a safer investment option like fixed deposits. 

Ensure to always maintain a budget and keep your expenses on track.

• Utilise Investments

Investments like FD and mutual funds can be used to fund the down payment of a house. If needed, you can withdraw part of your investment or take a secured loan against these assets.

• ‘Proportionate Release’ Option

Some lenders offer this option for new construction projects promoted by select developers. Herein, you can pay the down payment in small amounts over time instead of making a lump-sum payment. 

Thus, you can pay your down payment in instalments as the construction of a property may take a few years. Accordingly, the lender releases your home loan disbursements.

It is helpful to know the various ways by which you can save on your home loan down payment:

• Set Achievable Goals

Plan ahead when preparing to buy your home. Begin researching properties early, compare prices, and consider the impact of inflation to estimate the overall cost. This approach allows you to save systematically towards your home loan down payment.

• Maintain a Budget

Start preparing your budget on the 50/30/20 rule. Allocate the first 50% on essentials like electricity bills, water, insurance, rent and more. The next 30% will be set for personal wants like dining out, shopping, travel and more. 

The final 20% will go to other miscellaneous savings and investments. Ensure that you stick to this budget with full sincerity.

• Automate Your Savings

You can also save up for your future down payment on the home loan by creating a new savings account. Make a request to your bank to start automating money transfers from your existing account to your newly made account. 

This helps ensure a regular saving timeline so you can purchase your house in the future.